Brokers Update Their Stock Convictions

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            [1] => ((CFX))
            [2] => ((UGL))
            [3] => ((ILU))
            [4] => ((TEN))
            [5] => ((SEK))
            [6] => ((AQP))
            [7] => ((BHP))
            [8] => ((NWS))
            [9] => ((PNA))
            [10] => ((WES))
            [11] => ((STO))
            [12] => ((LLC))
            [13] => ((CHC))
            [14] => ((BPT))
            [15] => ((MRM))
            [16] => ((SAI))
            [17] => ((BLD))
            [18] => ((ASX))
            [19] => ((NAB))
            [20] => ((WPL))
            [21] => ((AMP))
            [22] => ((IPL))
            [23] => ((TAH))
            [24] => ((CWN))
            [25] => ((FXJ))
            [26] => ((IAG))
            [27] => ((MYR))
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            [2] => UGL
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            [6] => AQP
            [7] => BHP
            [8] => NWS
            [9] => PNA
            [10] => WES
            [11] => STO
            [12] => LLC
            [13] => CHC
            [14] => BPT
            [15] => MRM
            [16] => SAI
            [17] => BLD
            [18] => ASX
            [19] => NAB
            [20] => WPL
            [21] => AMP
            [22] => IPL
            [23] => TAH
            [24] => CWN
            [25] => FXJ
            [26] => IAG
            [27] => MYR
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)

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

– A largely disappointing result season
– The resource sector creams the rest
– Brokers readjust their preferred stock lists

By Greg Peel

The general response to this season's net profit results was one of disappointment, and the disparity of performance across different sectors was glaringly obvious.

The resources sector still managed to surprise to the upside despite already elevated expectations. The sector is clearly enjoying inflated commodity prices albeit costs are also rising commensurately and the Aussie dollar is a drag. The weather obviously played its part, and the January impact won't be included until next result season (August), but such impacts are (hopefully) not enduring.

Industrials were nevertheless mixed and while there was not a lot of hope surrounding retail, the sector still managed to disappoint. Other sectors saw individual wins and losses. Considering brokers began downgrading previously optimistic earnings forecasts in May last year, this result season has driven home the disparity between US and Australian performance. US results continued to surprise to the upside in the quarterly season just passed, while in Australia subsequent earnings downgrades outnumbered upgrades.

Two-speed economy? Too right. Goldman Sachs notes that in the six months to December, resource sector earnings grew 88%, bank sector earnings grew 13% albeit nearly all from Commonwealth ((CBA)), and industrial (ex-banks) earnings grew 3%.

Goldmans' Conviction List portfolio has been running at a 0.79% per month excess return providing 44.2% excess return since its inception in June 2006. To remind readers, while all brokers apply Buy, Hold and Sell or equivalent ratings to stocks, there are those Buys and Sells among them to which the analysts are specifically committed. Call them “Buy With a Bullet” or some such.

In the past three months, Goldmans has added CFS Retail ((CFX)) and United Group ((UGL)) to its Conviction List and removed Iluka ((ILU)), Ten Network ((TEN)) and Seek ((SEK)). Readers are also reminded that ratings are all about a comparison of broker valuations and market pricing and not “good or bad” companies.

The Goldman Conviction List currently contains, on the Buy side, Aquarius Platinum ((AQP)), BHP Billiton ((BHP)), CFS Retail, News Corp ((NWS)), PanAust ((PNA)), United Group and Wesfarmers ((WES)). There are no conviction Sells at present.

Macquarie's equivalent conviction list is called Marquee Ideas. Previously Macquarie maintained only a “leaders” portfolio but to that the analysts have now added separate “property” and “emerging leaders” portfolios. In the wake of the result season, the analysts have made no less than eleven changes to their Marquee Ideas.

Across all categories, positive (Outperform) additions are Santos ((STO)), BHP Billiton, Lend Lease ((LLC)), Charter Hall Group ((CHC)), Beach Petroleum ((BPT)), Mermaid Marine ((MRM)) and SAI Global ((SAI)). The one negative (Underperform) addition is Boral ((BLD)).

The end result is a leaders list of BHP and Santos as Buys and Boral, ASX ((ASX)) and National Bank ((NAB)) as Sells. The property list is all Buys, and contains CFS Retail, Charter Hall and Lend Lease. The emerging leaders list is also all Buys, and contains Beach, Mermaid and SAI.

UBS runs a more extensive Model Portfolio, and hence it is more noteworthy to highlight the additions and subtractions rather than the complete set. From a sector perspective, UBS is sticking to a Neutral rating on resources but has now moved to Overweight energy by virtue of an increased weighting in portfolio component Woodside ((WPL)) as a hedge against the rising oil price.

From a stock perspective, the result season wash-up has seen the addition (all Buys) of AMP ((AMP)), ASX, Incitec Pivot ((IPL)), Tabcorp Holdings ((TAH)) and Ten Network. The removals have been Crown ((CWN)), Fairfax ((FXJ)), Insurance Australia Group ((IAG)) and Myer ((MYR)).

Readers may have noted that Goldmans has added Ten Network and UBS has removed it at the same time. This is a good opportunity to remind less experienced readers that stock analysis is a matter of individual interpretation and not of hard and fast number crunching. Many assumptions and forecasts go into analyst models.

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